Should You Set Up a Trust for Your Child?

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When you think of trust funds, what comes to mind? Spoiled rich kids, living off the money set aside for them by their uber-wealthy parents? If so, you may be surprised to learn that you don't need to be a gazillionaire to benefit from a trust.

Read on to see if a trust might be right for your kids.

Estate Planning

Estate planning runs the gamut, from the basic to the complex, depending on your wealth and the complexity of your life. To put various estate planning documents, such as wills and trusts, into context — and to determine which ones you may need — consider the following three levels of estate planning.

Titles and Beneficiary Designations

For some of your assets, making sure they end up where you'd like them to requires very little effort on your part. You just need to make sure they are titled correctly or that you've designated the right beneficiaries. A will is generally not required. Even if you have a will, titles and beneficiary designations take precedence.

If you're married and want property to go to the surviving spouse should the other spouse die, simply titling the property in both of your names "with rights of survivorship" will accomplish that. This includes your home and car. For other assets, all it takes to transfer ownership as you'd like upon your death is to name the right people as beneficiaries. This includes life insurance, individual retirement accounts (IRAs), 401K accounts, and bank accounts. These are relatively simple steps with important implications, so make sure you've made the right choices on titles and beneficiary forms.

A Will

For everything not specifically earmarked via title or beneficiary designation — property titled in your name only, and everything that doesn't come with a beneficiary designation form (jewelry, art, a baseball card collection, your prized parakeet) — you'll need a will to get it where you want it to go. Otherwise your state's "intestate" laws will dictate who gets what. (Trust me, your state probably isn't interested in finding the best home for your bird.)

It is all the more important to have wills once you have children. This is the document in which you name a legal guardian for your kids in the event that you and your spouse both die, and you specify who will manage money for your children until they turn 18 (or 21 in some states).

Why Try a Trust?

For many people, a will is enough, especially if they don't own a lot of assets and don't have a very complicated financial life. For others, a will isn't enough; they also need a trust.

Once you accumulate more wealth, or if your life becomes more complicated (you have kids from a prior marriage, have property in another state, own a business), a trust may be in order. A trust does not replace a will; it is used in addition to a will. Here are some of its main benefits.

It Gives You More Control

Leaving a lot of money to an adult child can do more harm than good. With a trust, you can create a distribution schedule, perhaps giving them a quarter of the balance starting at age 25, and then another quarter every five years until it is all distributed. You can also name someone to manage the money while it is still owned by the trust and approve any early distribution decisions (perhaps you'd allow money to be accessed early for education or other purposes).

It Keeps Your Estate Out of Probate

Probate is a court-supervised process of validating your will, inventorying your assets, having property appraised, making sure assets are distributed according to the terms of the will, paying the bills of the deceased, and more. It is required if you have a will only, can take a year or longer, and can end up costing 2%–8% of the total value of the estate once you're done paying attorney's fees and court costs. A trust enables your heirs to bypass probate, freeing the trustee to wind down the estate without court supervision. 

It Keeps Information Private

Your will becomes public record upon your death. By contrast, the terms of a trust are not required to be made public.

It Helps Customize Estate Distribution

Depending on the complexity of your situation, a trust may help you customize the distribution of your estate more easily than a will. For example, you may want to leave more to an adult child in a low-income profession than another who works in a high-income profession. Or, you may want to keep a tight rein on how inherited money is used by a beneficiary known for his or her free-spending ways.

There are many types of trusts, but the most common type is a revocable living trust, which simply means you can make alterations if your circumstances change. Creating a trust requires the help of an attorney and could cost up to $3,000 to set up versus less than $1,000 for a will. However, the money-saving benefits of avoiding probate, and the added controls available for complex situations, may ultimately make a trust less expensive.

There are many variables involved in determining whether you need a trust. If, after reading this article, you suspect you may, talk with an experienced estate-planning attorney to further weigh the pros and cons. 

Have you considered a trust for your heirs?